Tesco pins UK turnaround on price cuts and store revamps

A
man pushes his shopping trolley into a Tesco store in
Hammersmith, west LondonThomson
Reuters

By James Davey and Neil Maidment

LONDON (Reuters) - Britain's Tesco , the world's third-largest
retailer, is to focus on cheaper pricing as it relaxes its view
on operating margins and steps up its store revamp program and
investment in online and convenience channels.

Outlining his plans at an investor and analyst seminar on
Tuesday, Chief Executive Philip Clarke said the measures
accelerate a turnaround plan aimed at countering increased
competition in the British retail market, but which has so far
failed to boost its languishing sales.

"This doesn't signal a need for a new strategy, simply to go
faster," Clarke said.

He did not explicitly abandon the company's target for a UK
operating margin target of a market-leading 5.2 percent, but he
did say that "the margin will be what the margin will be", while
Chief Financial Officer Laurie McIlwee declared that "cash, not
percentage margin, will define our success".

While not signaling a return to the "pile 'em high, sell 'em
cheap" mantra of Tesco founder Joseph Cohen, the apparent
abandonment of the target effectively says that Tesco will make
less profit from its revenue as it chases higher sales volumes
with lower prices.

In common with Britain's three other leading grocers - Wal-Mart's
Asda , Sainsbury's and Morrisons - Tesco is being squeezed
between the hard discounters Aldi and Lidl and upmarket grocers
Waitrose and Marks & Spencer , losing market share.

A commitment to reduce promotions and invest an additional 200
million pounds on UK price cuts will be seen as a direct response
to the rise of the discounters as well as moves by its biggest
rivals. Asda, for example, has pledged to spend more than 1
billion pounds ($1.67 billion) on price cuts over the next five
years.

SLOW PROGRESS

Tesco is 22 months into the turnaround program for its 3,150
British stores, having already spent more than 1 billion pounds
($1.7 billion) on refits, more staff and new product ranges, yet
sales at stores open for more than a year, excluding fuel and VAT
sales tax, fell 2.4 percent in the six weeks to January 4 and,
according to monthly industry data, have continued to fall since.

Shares in Tesco, down 10 percent over the past year, were little
changed by the close, finishing up 0.5 pence at 335.1 pence,
valuing the business at about 26.9 billion pounds.

"They need to be bolder and braver," Bernstein analyst Bruno
Monteyne said. "They will try to dominate the middle with better
prices and better quality, but they won't be big enough changes
to shift the needle."

The overall approach to growth and returns set out last year
remains the same, Clarke said, targeting mid-single-digit annual
growth in trading profit, return on capital employed (ROCE)
within a range of 12-15 percent and dividend growth broadly in
line with underlying earnings, with a target cover of more than
two times.

Tesco, which makes about two thirds of its revenue in Britain,
has suffered more than many rivals because it has more large
stores and traditionally sold a higher proportion of large-ticket
non-food items, such as domestic appliances, where shoppers cut
back most in an economic downturn.

To address that, Clarke has refocused the company's non-food
offer on higher-margin categories, such as clothing and
homewares, though only about a third of its huge Extra stores
have been refurbished so far. Tesco said the Extra format will be
a priority for 2014, with 110 slated for refits.

CONVENIENCE STORES

Clarke also plans to open 150 convenience stores a year, while
other initiatives include a planned doubling of click-and-collect
locations and the expansion of a scheme allowing loyalty card
holders to save on fuel.

The group, which trails France's Carrefour and U.S. giant
Wal-Mart in annual sales, also said it would reduce net new space
significantly, resulting in lower overall capital expenditure.

Having given guidance for net new UK space of about 1.4 million
square feet for 2013/14, it plans a further reduction to 0.7
million sq ft in 2014/15.

Group capital expenditure will drop to no more than 2.5 billion
pounds a year, its lowest level for 10 years, for at least the
next three financial years. Tesco had previously indicated a
figure of 3.2 billion pounds for 2013/14.

Clarke reiterated that the pursuit of disciplined international
growth remained a priority. On Monday Tesco said it was in talks
about a possible restructuring of its business in Turkey.

"Overall this is the 'middle way' message we expected ... nothing
that should cause panic across the industry," Deutsche Bank
analyst James Collins said. ($1 = 0.5994 British pounds)